NOTES TO THE FINANCIAL STATEMENTS 90

Note 8. Investments in Government-Sponsored Enterprises 

Congress established Fannie Mae and Freddie Mac as GSEs to support mortgage lending. A key function of the GSEs is 

to purchase mortgages, package those mortgages into securities, which are subsequently sold to investors, and guarantee the 

timely payment of principal and interest on these securities. 

Leading up to the financial crisis, increasingly difficult conditions in the housing market challenged the soundness and 

profitability of the GSEs, thereby threatening to undermine the entire housing market. In response Congress passed the 

Housing and Economic Recovery Act of 2008 (P.L.110-289) in July 2008. This act created FHFA, with enhanced regulatory 

authority over the GSEs, and provided the Secretary of the Treasury with certain authorities intended to ensure the financial 

stability of the GSEs, if necessary. In September 2008, FHFA placed the GSEs under conservatorship and Treasury invested 

in the GSEs by entering into a SPSPA with each GSE. These actions were taken to preserve the GSEs’ assets, ensure a sound 

and solvent financial condition, and mitigate systemic risks that contributed to market instability. 

The purpose of such actions is to maintain the solvency of the GSEs so they can continue to fulfill their vital roles in the 

home mortgage market while the Administration and Congress determine what structural changes should be made to the 

housing finance system. Draws under the SPSPAs result in an increased investment in the GSEs as further discussed below. 

Under SFFAS No. 47, Reporting Entity criteria Fannie Mae and Freddie Mac were owned or controlled by the federal 

government only as a result of (a) regulatory actions (such as organizations in receivership or conservatorship) or (b) other 

federal government intervention actions. Under the regulatory or other intervention actions, the relationship with the federal 

government was and is not expected to be permanent. These entities are classified as disclosure entities based on their 

characteristics as a whole. Accordingly, these entities are not consolidated into the U.S. government’s consolidated financial 

statements; however, the value of the investments in these entities, changes in value, and related activity with these entities

are included in the U.S. government’s consolidated financial statements. 

Senior Preferred Stock Purchase Agreements 

Under the SPSPAs, Treasury initially received from each GSE: 1) 1,000,000 shares of non-voting variable liquidation 

preference senior preferred stock with a liquidation preference value of $1,000 per share and 2) a non-transferable warrant for

the purchase, at a nominal cost, of 79.9 percent of common stock on a fully-diluted basis. The warrants expire on September 

7, 2028. Under the amended SPSPAs, the quarterly dividend payment changed from a 10.0 percent per annum fixed rate 

dividend on the total liquidation preference (as discussed below) to an amount equivalent to the GSE’s positive net worth 

above a capital reserve amount. The capital reserve amount, which was initially set at $3.0 billion for calendar year 2013, 

declined by $600 million at the beginning of each calendar year thereafter, and was scheduled to reach zero by calendar year 

2018. On December 21, 2017, Treasury and the FHFA modified the SPSPAs between Treasury and the GSEs to increase the 

capital reserve amount for each GSE back to $3 billion, effective with the December 2017 dividend payment. In exchange for 

the increase in the capital reserve, Treasury’s liquidation preference in each GSE increased by $3 billion on December 31, 

2017. On September 27, 2019, Treasury and the FHFA agreed to increase the capital reserve amounts of Fannie Mae and 

Freddie Mac to $25 billion and $20 billion, representing an increase of $22 billion and $17 billion, respectively, over the 

prior reserve amount of $3 billion each. In exchange, Treasury’s liquidation preference in each GSE will gradually increase 

up to the adjusted capital reserve amounts based on the quarterly earnings of each GSE. For the fiscal year ended September 

30, 2019, Treasury’s liquidation preference in Fannie Mae and Freddie Mac increased by $3.4 billion and $1.8 billion, 

respectively. The GSEs will not pay a quarterly dividend if their positive net worth is below the required capital reserve 

threshold. Cash dividends of $3.9 billion and $3.6 billion were received during fiscal years ended September 30, 2019, and 

2018, respectively. 

The SPSPAs, which have no expiration date, require that Treasury will disburse funds to the GSEs if at the end of any 

quarter, the FHFA determines that the liabilities of either GSE exceed its assets. Draws from Treasury under the SPSPAs are 

designed to ensure that the GSEs maintain positive net worth, with a fixed maximum amount available to each GSE under 

this agreement established as of December 31, 2012 (refer to the “Contingent Liability to GSEs” section below and Note 18 

—Contingencies). Draws against the funding commitment of the SPSPAs do not result in the issuance of additional shares of 

senior preferred stock; instead, it increases the liquidation preference of the initial 1,000,000 shares by the amount of the 

draw. The combined cumulative liquidation preference totaled $204 billion and $199 billion as of September 30, 2019 and 

2018, respectively. There were no payments to the GSEs for the fiscal year ended September 30, 2019. Actual payments of 

$4.0 billion were made to the GSEs for the fiscal year ended September 30, 2018. 

 
 91 NOTES TO THE FINANCIAL STATEMENTS

Senior Preferred Stock and Warrants for Common Stock 

In determining the fair value of the senior preferred stock and warrants for common stock, Treasury relied on the GSEs’ 

public filings and press releases concerning their financial statements, as well as non-public, long-term financial forecasts, 

monthly summaries, quarterly credit supplements, independent research regarding preferred stock trading, independent 

research regarding the GSEs’ common stock trading on the OTC Bulletin Board, discussions with each of the GSEs and 

FHFA, and other information pertinent to the valuations. Because the instruments are not publicly traded, there is no 

comparable trading information available. The fair valuations rely on significant unobservable inputs that reflect assumptions 

about the expectations that market participants would use in pricing. 

The fair value of the senior preferred stock considers the amount of forecasted cash flows to equity. The fair valuations 

assume that a hypothetical buyer would acquire the discounted dividend stream as of the transaction date. The fair value of 

the senior preferred stock decreased as of September 30, 2019 when compared to September 30, 2018, mainly driven by the 

increase in the market value of the GSEs’ other equity securities that comprise the GSEs’ total equity value. The effect of the

market value increase was partially offset by a lower discount rate, driven by a lower risk-free rate and reduced volatility 

among comparable companies. 

Factors impacting the fair value of the warrants include the nominal exercise price and the large number of potential 

exercise shares, the market trading of the common stock that underlies the warrants as of September 30, the principal market, 

and the market participants. Other factors impacting the fair value include, among other things, the holding period risk related 

directly to the assumption of the amount of time that it will take to sell the exercised shares without depressing the market. 

The fair value of the warrants increased at the end of fiscal year 2019, when compared to 2018, primarily due to increases in 

the market price of the underlying common stock of each GSE. 

Estimation Factors 

Treasury’s forecasts concerning the GSEs may differ from actual experience. Estimated senior preferred values and 

future draw amounts will depend on numerous factors that are difficult to predict including, but not limited to, changes in 

government policy with respect to the GSEs, the business cycle, inflation, home prices, unemployment rates, interest rates, 

changes in housing preferences, home financing alternatives, availability of debt financing, market rates of guarantee fees, 

outcomes of loan refinancings and modifications, new housing programs, and other applicable factors. 

Contingent Liability to GSEs 

As part of the annual process undertaken by Treasury, a series of long-term financial forecasts are prepared to assess, as 

of September 30, the likelihood and magnitude of future draws to be required by the GSEs under the SPSPAs within the 

forecast time horizon. Treasury used 25-year financial forecasts prepared through years 2044 and 2043 in assessing if a 

contingent liability was required as of September 30, 2019 and 2018, respectively. If future payments under the SPSPAs are 

deemed to be probable within the forecast horizon, and Treasury can reasonably estimate such payment, Treasury will accrue 

a contingent liability to the GSEs to reflect the forecasted equity deficits of the GSEs. This accrued contingent liability will 

be undiscounted and will not take into account any of the offsetting dividends that could be received, as the dividends, if any, 

would be owed directly to the General Fund. Treasury will adjust such recorded accruals in subsequent years as new 

information develops or circumstances change. If future payments are reasonably possible, they are disclosed but not 

recorded as an accrued contingent liability. 

Based on the annual forecasts as of September 30, 2019 and 2018, Treasury estimated there was no probable future 

funding draws. As of September 30, 2019, it is reasonably possible that market volatility or non-recurring events—for 

instance, changes to accounting policies that impact credit loss provisions—could potentially cause the GSEs to generate 

quarterly losses and, therefore, result in future funding draws against the funding commitment. Due to challenges quantifying 

future market volatility or the timing, magnitude, and likelihood of non-recurring events, the total amount of this reasonably 

possible future funding liability could not be estimated as of September 30, 2019. There were no payments to the GSEs for 

fiscal year ended September 30, 2019. At September 30, 2019 and 2018, the maximum remaining funding commitment to the 

GSEs for the remaining life of the SPSPAs was $254.1 billion. Subsequent funding draws will reduce the remaining 

commitments. Refer to Note 19—Commitments for a full description of other commitments and risks. 

In assessing the need for an estimated contingent liability, Treasury relied on the GSEs’ public filings and press releases 

concerning their financial statements, monthly summaries, and quarterly credit supplements, as well as non-public, long-term 

financial forecasts, the FHFA House Price Index, discussions with each of the GSEs and FHFA, and other information 

pertinent to the liability estimates. The forecasts prepared in assessing the need for an estimated contingent liability as of 

September 30, 2019 include three potential wind-down scenarios, with varying assumptions regarding the timing as to when 

the GSEs would cease new business activities, including purchasing mortgage loans and issuing new guaranteed MBS. The 

forecasts as of September 30, 2019, also assumed the maintenance of the GSEs’ retained mortgage portfolios (and 
NOTES TO THE FINANCIAL STATEMENTS 92

corresponding net interest income) below the $250 billion maximum permitted under the SPSPAs. The maximum balance of 

each GSE’s retained mortgage portfolio was initially set at $650 billion as of December 31, 2012, and the amended SPSPAs 

required that the GSEs reduce this maximum balance to $250 billion by December 31, 2018, which was accomplished by 

both GSEs. 

Regulatory Environment 

To date, Congress has not passed legislation nor has FHFA taken actions to end the conservatorships to address the 

future of the GSEs. The GSEs continue to operate under the direction of their conservator, the FHFA. On March 27, 2019, 

the President issued a Memorandum that directed the Secretary of the Treasury to develop a plan for administrative and 

legislative reforms to achieve the following housing finance reform goals: (1) ending the conservatorships of the GSEs upon 

completion of specified reforms; (2) facilitating competition in the housing finance market; (3) establishing regulation of the

GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the U.S.; and 

(4) providing that the federal government is properly compensated for any explicit or implicit support it provides to the GSEs 

or the secondary housing finance market. On September 5, 2019, Treasury released their Housing Reform Plan, which 

included recommended legislative and administrative reforms to achieve each of these goals. 

 The Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78) was funded by an increase of ten basis points in 

the GSEs’ guarantee fees (referred to as “the incremental fees”) which began in April 2012 and is effective through 

September 30, 2021. The incremental fees are remitted to Treasury and not retained by the GSEs and, thus, do not affect the 

profitability of the GSEs. For fiscal years 2019 and 2018, the GSEs remitted to Treasury the incremental fees totaling $3.9 

billion and $3.6 billion, respectively. 

 As of September 30, 2019, and 2018, GSEs investments consisted of the following: 

 

Investments in GSEs as of September 30, 2019 

Cumulative 

Gross Valuation Fair 

(In billions of dollars) Investments Gain/(Loss) Value 

Fannie Mae senior preferred stock ................................. 127.0 (78.3) 48.7 

Freddie Mac senior preferred stock ................................ 77.3 (38.5) 38.8 

Fannie Mae warrants common stock .............................. 3.1 12.9 16.0 

Freddie Mac warrants common stock ............................. 2.3 6.3 8.6 

 Total investments in GSEs ......................................... 209.7 (97.6) 112.1 

Investments in GSEs as of September 30, 2018 

Cumulative 

Gross Valuation Fair 

(In billions of dollars) Investments Gain/(Loss) Value 

Fannie Mae senior preferred stock ................................. 123.7 (64.5) 59.2 

Freddie Mac senior preferred stock ................................ 75.4 (31.2) 44.2 

Fannie Mae warrants common stock .............................. 3.1 3.2 6.3 

Freddie Mac warrants common stock ............................. 2.3 1.2 3.5 

 Total investments in GSEs .......................................... 204.5 (91.3) 113.2